Fitch: 7 factors that will shape the housing market in 2014

Despite the anemic housing market start so far in 2014, housing metrics should improve later this year, according to Fitch Ratings’ Chalk Line report.
The pickup will be driven, Fitch says, by faster economic growth, some acceleration in job growth, and it will happen despite somewhat higher interest rates, as well as more measured home price inflation.
“Comparisons have been a challenge so far this year, with most housing metrics falling short of expectations from a year ago,” said Robert Curran, managing director and lead homebuilding analyst for Fitch Ratings. "Though the severe winter throughout much of North America has restrained some housing activity, buyer sensitivity to home prices and finance rates and the slowing of job growth at year-end is resulting in diminished consumer momentum.”
Fitch expects stable ratings for most issuers within the homebuilding sector in 2014, reflecting a continued, moderate cyclical improvement in overall construction activity as the year progresses.
Digital Risk's CAO Tom Showalter takes a slightly more pessimistic approach.
Showalter says that the market is currently experiencing friction as a result of economic factors such as Fitch points out, including rising home prices, stagnant income levels, and investor participation in the marketplace.
He believes this friction will keep the housing market from revving up in 2014.

"You know what happens in an engine when you get too much friction and the car just doesn't rev as fast? Its one of those friction based arguments rather than a 'catastrophic change' based arguments. What I’m saying is that there is so much friction here; the friction from the regulators, the friction from the lenders, friction from the borrowers (median incomes aren't going up, coming up with down payments are tough, they aren't sure the house is priced correctly) every one of those reasonable propositions is a source of friction," Showalter said.
Fitch is tapering its forecast to reflect the subpar spring selling season. Single-family starts are now projected to improve 15% to 710,000 as multifamily volume grows about 9% to 335,000.
Fitch projects new home sales to advance about 16% to 500,000 and existing home volume to remain flat at 5.10 million.
This is largely due to fewer distressed homes for sale. New home price inflation should moderate in 2014, at least partially because of higher interest rates. Average and median new home prices should rise about 3.5% in 2014.
“The investors are gradually leaving the market as prices rise, and the retail buyer is waiting in the wings. There are some markets, like Miami and San Francisco, that are driven by outside factors, but markets like St. Louis and Omaha and parts of California and Nevada that aren't driven by structural factors that are unique and powerful, they are going to suffer the friction as the retail buyer struggles to get back into the marketplace," Showalter said.
What are the seven dynamics that Fitch says will shape the housing market through the rest of 2014?
1) Lack of Momentum

Comparisons are challenging through first-half 2014, and so far this year most housing metrics seem to have defied expectations and fallen somewhat from a year ago. Though the severe winter throughout much of North America has restrained some housing activity, nonetheless, there is an absence of underlying consumer momentum this spring, perhaps due to buyer sensitivity to home prices and finance rates and the slowing of job growth at year end.

2) Recovery Supports Ratings, Likely Some Upgrades

Fitch Ratings expects stable ratings for most issuers within the homebuilding sector in 2014, reflecting a continued, moderate, cyclical improvement in overall construction activity during the year. Of course, financial performance will vary among issuers, reflecting customer, geographic and product strengths. However, there is the potential for a few upgrades.

 3) Public Builders Continue to Outperform

Generally, the major public builders realized much stronger operating results, year over year, during fourth-quarter 2013 and, for the full year, they gained market share. On average, fourth-quarter net orders were down 1.7%. The unit backlog typically improved 8.5% (22.6% on a dollar basis). The implied price in backlog grew 12.8%, largely due to price increases.

4) 2014 Volume Should Increase Moderately

Housing metrics should improve in 2014 due to faster economic growth, and some acceleration in job growth, despite somewhat higher interest rates, as well as more measured home price inflation. However, we are tapering our forecast to reflect the subpar spring selling season. Single-family starts are now projected to improve 15% to 710,000 as multifamily volume grows about 9% to 335,000. Thus, total starts this year should top 1 million. New home sales are forecast to advance about 16% to 500,000, while existing home volume is flat at 5.10 million, largely due to fewer distressed homes for sale.

5) Positive Valuations and Affordability

Still-attractive home prices in most markets, low absolute mortgage rates and a moderate rise in nominal incomes have driven improved affordability and valuations. Mortgage rates remain well below their historic averages and housing pricing remains undervalued versus incomes.

6) Challenges Persist

Demand will continue to be affected by narrowing of affordability, diminished but persistent and widespread negative equity, challenging mortgage-qualification standards and lot shortages. As Fitch has noted in the past, the recovery will likely remain fitful.

7) Caution on Land Spend and Liquidity

The improving economy warrants reasonable optimism on the part of builders, but some restraint should be exercised as to excessive new land purchases and meaningful depletion of liquidity in these still-uncertain times.